Andrés Blanco, Corina Boar, Callum Jones, and Virgiliu Midrigan
Working Paper 2024-12
September 2024
Abstract:
We develop a tractable sticky price model in which the fraction of price changes evolves endogenously over time and, consistent with the evidence, increases with inflation. Because we assume that firms sell multiple products and choose how many, but not which, prices to adjust in any given period, our model admits exact aggregation and reduces to a one-equation extension of the Calvo model. This additional equation determines the fraction of price changes. The model features a powerful inflation accelerator—a feedback loop between inflation and the fraction of price changes—that significantly increases the slope of the Phillips curve during periods of high inflation. Applied to the U.S. time series, our model predicts that the slope of the Phillips curve ranges from 0.02 in the 1990s to 0.12 in the 1970s and 1980s.
JEL classification: E31, E32, E52
Key words: Phillips curve, inflation, price rigidities
https://doi.org/10.29338/wp2024-12
The authors thank Mark Gertler for useful feedback, Hugh Montag and Daniel Villar for sharing the data on the frequency of price changes, and Suk Joon Kim for excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Andrés Blanco, Federal Reserve Bank of Atlanta; Corina Boar, New York University and NBER; Callum Jones, Federal Reserve Board; Virgiliu Midrigan, New York University and NBER.
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